Scientific Beta

This article, published in the Summer 2021 issue of the Journal of Impact & ESG Investing, highlights that proper incorporation of climate change issues into portfolio management requires attention to firm-level greenhouse gas emissions. Since value chain emissions make up the largest share of emissions for most firms, their consideration appears natural for both impact- and risk-management motivated investors. However, the reporting of these emissions remains voluntary in most jurisdictions and is sparse. Furthermore, reporting standards are not intended to support comparisons between firms. 

Proper incorporation of climate change issues into portfolio management requires attention to firm-level greenhouse gas emissions. Since value chain emissions make up the largest share of emissions for most firms, their consideration appears natural for both impact- and risk-management motivated investors. However, the reporting of these emissions remains voluntary in most jurisdictions and is sparse. Furthermore, reporting standards are not intended to support comparisons between firms. While data providers offer value chain emissions estimates, these typically take insufficient consideration of firm-level circumstances to support intra-sector comparisons. Investors should thus treat the integration of value chain considerations into asset selection with extreme caution. Value chain emissions may be used to guide overall policy, implement sector allocation, or initiate engagement with firms. Value chain considerations still may be included into asset selection or weighting via specific, firm-level performance metrics and/or commitments to decarbonize. Investors also should advocate for value chain emissions disclosure in their policy and issuer engagements.